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Ed publisher feels sting of giving Amazon cold shoulder

March 31, 2017

Terminally broken MLM business bleeding consultants at an already rapid rate that should worsen.

Little to no liquidity remaining; existing leverage and a new banking relationship likely limit flexibility from traditional sources.

Major execution risks as company undergoes a rip out of a failed IT system implementation and reverts back to an antiquated one.

Accounting issues, controller resignation, potential restatements and CEO/management arguably posting insider info on message boards/social media.

Equity fair value 60% lower at ~$3.50 on a probability-weighted basis, but could certainly prove to be worth much less.

 

Summary

Like many businesses, Educational Development Corporation (NASDAQ:EDUC), a distributor of children’s books, was feeling the competitive heat from Amazon (NASDAQ:AMZN) a few years ago. In response, the company’s outspoken CEO eliminated the Internet giant as a retail partner and then courted an aggressive multi-level-marketing (“MLM”) strategy, parlayed predominantly through young, mothered sales agents, or “consultants”. At the time the decision was allegorically lauded as David taking on Goliath. EDUC’s subsequent 7x growth in consultants and revenue in recent years, not to mention a Facebook (NASDAQ:FB) fan page dedicated to the CEO, offered evidentiary justification to the decision’s biblical theme and strategic rationale. Unfortunately, the company was ill-prepared to handle the MLM-driven growth that ensued, culminating in disastrous shipping mishaps during the 2016 holiday season. Compounded by a litany of highly questionable operational decisions along the way, the company now finds itself levered, without cash, fully drawn on a revolver expiring in June, and quietly and inconspicuously, with a rapidly dwindling base of MLM consultants. If this toxic recipe were not enough, accounting issues exist, and we have found examples of what in our opinion appear to be multiple SEC Reg-FD violations by current and former management. As consultants disappear, the shares could retreat toward their pre-MLM fair value around ~$3.50, but given the precariousness of EDUC’s financial profile and other major concerns, could also prove to be worth much less. In other words, the MLM strategy, what was once considered David’s hurled sling at Goliath Amazon, may ironically turn out being a boomerang currently on a return path to EDUC’s head.

http://bit.ly/2oIXGhO

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